The determination of the costs of car insurance is affected by a number of
different factors. We can divide these factors into three categories.
The first determinant of the cost of your insurance is your personal
circumstances, like your age, your insurance history, the type of car you drive
and the circumstances in which it is housed and driven.
The second factor is the level of cover and extra benefits that you want -
the more you want, the more you'll pay, quite obviously. Once again, certain
packages offer more value for money than others, so shop around.
The third area that affects the cost of insurance is an area that you can do
nothing about. These are industry conditions and market circumstances. Let's
have a closer look at these.
The number of claims
In the South African context, one of the biggest determinants of insurance costs
is the sheer number of claims. This is once again related to the sky-high
incidence of vehicle theft. Simply put - we pay so much for our car insurance
because so many cars are stolen. All insurance works on financial risk
modelling. Insurance companies are only viable businesses because the amount of
money coming in as premiums is more than the amount paid out for claims. (Of
course this is a bit of an oversimplification, but the point is valid.)
So because insurance companies are having to pay out more and more claims, in
order to retain financial viability, they have to keep raising premiums. We all
bear the cost of this together, whether we actually claim or not.
Rising costs of repairs and medical treatment
This is a point that's allied to the first one. As repair costs and costs of car
components go up, so do the amounts that are claimed for these. Medical costs
that are covered by car insurance policies are also becoming increasingly
expensive.
All of these increasing costs are passed on in the form of more expensive
premiums.
The high accident rate
It's common knowledge that South Africa has pathetically high accident rate.
There are many reasons for this, including bad driving, unroadworthy cars,
excessive speeding, a general lack of concern for good driving standards,
unlicensed drivers (or drivers that have bought licenses), and excessive speed.
More accidents mean more claims - which mean higher premiums.
Lack of insurance of other drivers
In this country, more than many other countries, a vast proportion of people
don't have car insurance. They also mostly drive older cars, which are often not
roadworthy - and, as all of us who drive can testify, the general standard of
driving is not very high. All of this means that they are more likely to cause
accidents, and not have insurance to pay for damage to your car. Your insurance
policy therefore has to pay for repairs that the other party should actually be
paying. With this happening so often, insurers are having to pay more claims
than they otherwise would - hence increased premiums.
The investment environment
One of the main things that insurance companies do with premiums in order to
make a profit, is to invest in the stock market. If market conditions turn
unfavourable, and investments don't make the returns that the insurance
companies have calculated that they will, then they need to make up their
budgets. And guess what - they increase premiums.
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